The ability to pay one’s debts in full from one’s own money when they fall due.
Section 95A of the Corporations Act 2001 (Cth) defines solvency as follows:
- A person (including a company) is solvent if, and only if, the person is able to pay all the person’s debts, as and when they become due and payable.
- A person who is not solvent is insolvent.
At common law, the test for solvency is the cash-flow test which assesses the ability of a company to pay its debts (or sell its assets fast enough to pay its debts) as they become due and payable. The cash flow test requires an analysis of:
- The company’s existing debts;
- Whether the company’s debts are payable in the near future;
- The date each debt will be due for payment;
- The company’s present and expected cash resources; and
- The dates any company income will be received.